Business Studies Notes Unit 1: Make or Break?

Enquiry 1: What is an Enterprise

Entrepreneurship means being prepared to take risks and having the flair and skills needed to set up and run a business or other organization. The reward for risk taking is profit A Sole Owner is an individual who runs a business and is personally responsible for any losses incurred. Advantages Easy to set up You are your own boss You decide what happens to the profit Disadvantages You have to work long hours You have unlimited liability, if you go bankrupt by owning $10 million, you have to pay it by selling what ever you have. There are 2 types of limited company- private and public The business is treated as another person, it has a legal identity It is a limited liability and the owners only lose the money invested It needs a memorandum of association- which tells the world who the business is and where it is based It also needs an article of association- this sets out how the business will be run It is owned by share holders, the more shares you own, the more control you get Partnership A partnership must consist of between 2 and 20 partners. This form of ownership is generally appropriate for professional businesses such as doctors, dentists, estate agents and solicitors. Disadvantages Conflicts created different goals, ideas etc. Limited amount of investors (up to 20) Changes according to partners coming in and out of the enterprise (death) Responsible for partner(s) debts and actions (those who have unlimited liability) Share profits Advantages Combined skills and specialisation Support in decision making and division of work More financing available (than a sole proprietor) More continuity than a sole proprietor. If 1 partner dies the business keeps running

Private Limited Companies (Ltd.) Shares are sold privately usually to family friends and employees (may not publicly advertise the sale of its shares. There is now no limit to the amount of shareholders (used to be 50). The company must display Ltd. after its name to make it clear to anyone dealing with the business that its liability is limited. Advantages Members liability is restricted to the amount of shares they own. They have limited liability. Additional capital can easily be raised by selling more shares. The company can continue to trade even if one of its members dies (continuity). Shares can be bought and sold with directors approval (you get to pick who invests in your company). The private company has a separate legal existence from that of its owners. It can own property, sue and be sued. This type of organisation has a much higher business status than a sole trader. Disadvantages Audited annual returns and accounts have to be made with the Registrar of Companies. All these documents are available for public inspection. An Ltd. is more expensive and time consuming to set up than a sole trader of partnership. Professional help will be needed to set up an ltd. A company is limited to the type of business described in its professional documents. (Cannot change the business activity). There is a separation of ownership and control which means that the owners no longer make all the decisions. There are limited opportunities for economies of scale. Public Limited Companies (plc) This form of business is only suitable for very large businesses. You must have a minimum of 50,000 authorised share capital. It can invite the general public to purchase its shares (which are quoted on the Stock Exchange) and there is no limit to the number of shareholders. The company must use public limited company or plc after its name. Advantages Members liability is restricted to the amount of shares they own (limited liability). Additional capital can easily be raised by selling more shares. The company has continuity, even if one of its members dies. The plc has a separate legal existence from its owners. It can own property, sue and be sued. The plc is able to exploit economies of scale (decrease in unit costs) due to its size. This type of organisation has a much higher business status than a sole trader. Disadvantages Audited annual returns and accounts have to be made with the Registrar of Companies. All these documents are available for public inspection. A plc is more expensive and time consuming to set up than a sole trader of partnership. There is a separation of ownership and control which means that the owners no longer make all the decisions.

Unwanted takeovers are possible as shares are openly bought and sold. Plcs can be seen as remote from their customers. If the plc becomes too large, it may suffer from diseconomies of scale, where unit costs begin to rise. Franchise A franchise is the right to sell a good or a service produced by a large, possibly multinational, business (franchisor) on the payment of a fee (royalty payment) plus a percentage of the profits. The small business buying the franchise is called the franchisee. Advantages Franchisors benefit as they are able to expand their business with limited finance. Franchisors receive a proportion of income from the franchisee in the form of a licence fee. Franchisees gain from the back-up support offered by the franchisor. This includes promotion, R & D and administrative help. Franchisees are able to keep any remaining profit and this can be a great motivator. Franchisees are often starting a business that already has a well-known name and has been tried and tested in other areas. So it is less risky. If franchisees set up as a limited company, they have the benefit of limited liability. Disadvantages (franchise) Franchisees have to sign a contract with the franchisor and often this ties them to rules and regulations on stock, suppliers, layout of outlets and advertising, which leaves little room for individual flair and ideas. Popular franchises are very expensive. Franchisees are often restricted to a specific site and for a specific time. A royalty payment has to be paid to the franchisor, even when a loss has been made. If franchisees set up as sole traders or partnerships, they face unlimited liability. Co-operatives Co-ops are owned and controlled by their members (minimum 2). Co-ops in the UK include: CWS(Co-operative Wholesale Society), Co-operative Bank, CIS (Co-operative Insurance Society), Co-op Travel care, CWS Funeral Services, Associated Co-operative Creameries, Coop Eye care as well as engineering, farms, property and development and non-food manufacturing. Co-ops each have a committee made up of members and is accountable to members (not shareholders of city bankers). There are 3 types of co-ops: 1. Workers co-operatives where the business is owned and controlled by the workers. Each member has 1 vote and puts in an equal amount of capital (money). Risk of failure and success can then be shared equally. 2. Consumer co-operatives where a group of consumers want to buy together in bulk to gain cheaper prices. In this way, they are able to share equally any gains that they make. 3. A producers co-operative is where producers join together either to create their own market or to take advantage of joint marketing or joint purchasing of expensive items of equipment. Advantages Every member is a shareholder and therefore each is committed to the success of the business.

 Members are able to set their own terms and conditions for the business including
pay.

production. The cooperative can benefit from the range of ideas and experience brought by its members. Disadvantages Democratic decision making can be slow and frustrating for members. Members may disagree. Customers and members of the business and finance community may see co-operatives as low status. Not everyone may have the same commitment to the co-operative. The committee that controls the co-operative may lack business expertise.

Members control all elements of the business, including recruitment, pricing and

Charity, Not-for-profit, Voluntary sector An organisation set up to raise funds and support other people or a cause. Their aim is to raise enough funds or a surplus to use for helping others. The management of the work is overseen by a group of trustees (volunteers with a reputation as responsible citizens) Advantage Charities tend to attract trustees who have a well of experience in both charitable and business activity. Disadvantage Must still work in competitive world Must register as a charity and produce annual accounts that are available for anyone to see Public Sector The Public Sector includes everything that is owned, managed and financed by the government This is things like the army, hospitals and most schools Public means owned by the government for the benefit of the people The public sector receives funds in the form of tax and business rates form local businesses Private Sector The Private Sector contains all business owned, managed and financed by private individuals Almost all businesses are in the private sector Private means that the businesses are run for the benefit of the people who own them Businesses in the private sector gain money from capital invested by shareholders and profit

Enquiry 2: Is there a market What Makes a Market? A market is where a seller and buyer meet, it could be anywhere like shops, internet etc. Market is not just about selling goods, but also services, things that you want other people to do for you like having a haircut or your car repaired. People are brought together in a market, when the either want to sell or buy, but what makes the sale take place is the price, the purchase will only take place if both think they are getting a good value. The seller will sell a product if he is covering the cost of selling the product and making some profit. Its all clear Demand- what consumers are prepared to buy Demand means the quantity of the product that the consumers are willing and able to buy. The law of demand is that as the price increases the quantity demand will fall and vice versa At a lower price more people can afford the product and it becomes cheaper than its competitors product

Supply- what producers are prepared to sell at Supply is the complete opposite The law of supply is that as the price increases the quantity supplied increases and vice versa When the price is low very few producers will be able to make a profit, so the supply is small At high prices even inefficient producers can make a profit, so the supply is large

Market clearing price Producers what to sell at a high price and consumers want to buy at a low price, the market place forces them to compromise If the prices are too loo there is a shortage and producers are able to increase their price If the prices are too high there is a surplus and producers will have to reduce prices to persuade more to buy unsold goods Eventually, both agree on the price and quantity to be exchanged, this point is called the market clearing price

Markets are where sales happen 1. 2. Mass Markets sell ordinary things in very large numbers of people at quite cheap prices Niche Markets is a gap in the market which a firm might want to fill with a new product

Market are segmented into different groups of people 1. 2. 3. 4. 5. Age- for example the teenage market, or grey power Social class- class A (Professionals) down to class E (The Unemployed) Location- try selling stottie cakes outside the Northeast, or jellied ells outside London Culture or religion- different groups have their own products Gender- for example, chocolate manufacturers target items at women and some at men

Enquiry 3: Is it competitive? Fixed and Variable Cost Fixed costs are costs which do not vary with out put. They have to be paid, even if the firm produces nothing Variable costs are costs that will increase depending on the output Some costs are semi variable, for example labour wages are largely fixed and only a fraction of their wages varies according to output Fixed costs increase when things like offices are expanded and more managers and workers are hired

TOTAL COST = FIXED COST + VARIABLE COST Sales Revenue and Profit Sales Revenue is the amount of money a company has made by selling its products. It can be calculated by multiplying the price the number of products sold. Profit is the money a company makes for selling its products. It can be calculated by taking away the costs from the sale revenue Adding Value and Brand Name Business use different ways to convince customers that they should pay more than what it costs them to produce and make the product available. one such way is by having branded products which are designed to give a message or portray an image. Businesses also add value

by making the product convenient or improving the product or changing packaging ( Detergent packs come in a storage box, refill bags, travel packs, scoop inside etc.)

Competitiveness A company has too be competitive and look out if its nearest competitor is doing something to lure away the customers from you. They could either provide better quality than you or charge prices lower than you. A company could have competitive advantage by having something distinct and defensible. Some companies are very competitive because they can offer a cheaper price than you. but a worse quality product than you, open up shops in low-cost locations and make more money than you.

Enquiry 4: What is success? Profit and Competitiveness All businesses look at profits, but in isolation they mean nothing. Profits need to be compared to other businesses which are similar in size and make similar products Share price is also important as it reflects what investors think in terms of prospect of future growth. Investors buy shares for 2 reasons. To sell the share at a higher price, at a later date. Secondly to get a part of the profit called dividends. For this reason ROCE is extremely important, as well as profit margins. The ROCE shows the decisions the company has made. The types of machinery and equipment the business decides to invest will impact the ROCE. The companies must consider all options and the benefits of choosing one option over the others this called opportunity cost Competitive Advantage For a business to achieve competitive advantage it must be distinct and defensible. Competitive advantage could be its work force, in that employes add value by being high quality and/or by producing high quality products Employees work more efficiently if they have a stake in the business given shares as a bonus and also loyalty (not just weekly or monthly pay, these are financial rewards) These financial rewards are likely to offer financial security but there are other was to increase loyalty i.e. quality. e.g Job satisfaction, improving self esteem or sense of achievement and even ambition Trade Unions

Trade unions are there to protect and negotiate on behalf of individual employees (more bargaining power as a unit than individually) focus is on better working conditions, pay, protection from unfair dismissal. Today businesses develop good relationship with employees, so no need for unions others have positive and productive relationship unions help them work more efficiently. However some have poor relationship, lead to conflict, poor performance and quality Productivity and Security A successful and happy workforce will increase productivity. This would mean higher output and good quality goods, it also lowers cost. In turn the company becomes more competitive and it benefits consumers as they get lower prices. Also the workforce will get paid more as costs decrease, but if demand decreases, this creates insecurity as less is needed, so not many workers are needed to do the job

Stakeholder Theory Stakeholders are groups of people who have an interest in a businesss activities. When businesses need to make decisions they should consider how they will affect different stakeholders. Internal Stakeholder Model

Internal Stakeholder Mode

Enquiry 5: Why do firms go under?

There are many signs that should signal to a business that they are on the verge of failure. The most common sign of a business weak performance is declining sales. But there are other indicators such as: losing market share to competitors shrinking profits (which means less money to maintain and develop the business and less reward for the shareholders) ROCE value will decline as will the value of a companys shares

Directors, managers and owners may try to cut costs, improve quality or develop new products or services to suit the change in customers tastes. However, if unsuccessful the firms competitive advantage will be lost and the downward trend will continue. This could result in: the resignation of key directors and the appointment of a new management team to try and rectify the problem

a takeover by another competing firm could also result which is likely to include closure of some parts or branches of the firm and redundancies

extreme cases, receivership (going bust) where the firm is found unable to repay its bills or debts (and is unable to obtain a bank loan). The courts pass the business on to a receiver who will sell parts or all of the business in order to pay the companys debts.

There are three main causes of firms going under: 1. Shift in demand where decision makers lose sight of the needs and desires of their market (customers). Businesses need to realise that people and ways of life are always changing and every business must keep up with those changes or the competition will. 2. Loss of competitiveness where a firm may lose its cost advantage or quality advantage. World- class firms are those with a strong competitive advantage in all major markets they also keep up with changes in consumers demands. 3. Poor cash flow management firms usually need to pay their suppliers before they actually sell their products, additionally cash is need to pay wages and monthly bills regardless of the amount of sales. If a firm has more cash going out of the business than coming in they will encounter liquidity problems. This will result in the inability to pay their debts: If suppliers are not paid they stop supplying you with goods you need to sell If workers are not paid employees will quit and products can not be made or sold If banks are not paid they may seize equipment, furniture etc. that was bought with the loan If rent is not paid the landlord may serve an eviction notice

A firm may borrow (usually at higher interest rates as they become a higher risk to the bank and be given a credit limit where the bank refused to lend anything above because of this risk) but this also puts more cash flow problems if the firm does not find ways to bring cash in more quickly. This is why it is important to set monthly and even yearly budgets to see when there may be cash flow problems and plan ahead.

Unit 2: Work or What? Enquiry 1: Whats the point of work?

Ten points to remember

1. The most important of the production factors is labour.(the other three are
enterprise, capital and land)

2. Firms want people to work harder or more efficiently. 3. To do this they can offer rewards or motivators. 4. People work for more than just money. 5. People like to be appreciated and valued. 6. Maslow describes a hierarchy of needs survival, security, social, status and selfactualisation.

7. McGregor thought that workers are naturally motivated Theory Y not Theory X. 8. Herzberg sees some factors as basic to motivation. These he called hygiene factors.

9. People can be motivated by perks such as extra pay, bonuses, rewards and other
incentives. The personnel dept. in a large firm deals with employees.

10.

Enquiry 2: Whos right for the job?

Ten points to remember

1. Recruitment is how a firm finds the staff it needs. 2. Most jobs are advertised. 3. Employers must advertise in the right place. 4. Jobseekers must know where to look. 5. Application is how jobseekers apply for jobs. 6. Forms, letters and CVs are all used. 7. Selection is how employers choose between applicants. 8. The selection process is usually long listing, short listing and interview. 9. Some firms use methods other than interview. 10.
Once appointed, a Contract of Employment MUST be made.

Motivation and theorists Motivation is about how keen and committed a person is in performing a task or job. The more motivated a worker is (combined with their skills) the more value they add to their job, which is a huge benefit to the company in increase productivity from than employee. An employer will try to assess skills and likely motivation at an interview (in part to help whether to employee that person but also to see the pay package see rewards). There are several motivation theories but the three we will be studying are those developed by:

1. McGregor: 2. Herzberg : 3. Maslow:

Theory X and Theory Y Hygiene factors and Motivators Hierarchy of Human Needs

It

is

important for managers to find out how best to motivate their subordinates (employees who are below them in the organisation and for whom they are responsible for). McGregor Theory X and Theory Y A manager would believe that : Theory X workers: workers: Theory Y

dont like working do as little as they can get away with dont like things to change need to be told what to do cant be trusted to make decisions are only motivated by money must be closely watched cant be trusted or relied on

enjoy their work will work hard to gain rewards want to see things happening will work independently can be trusted to make decisions are motivated by things other than money can work unsupervised are trustworthy and reliable

McGregor believed that if people were treated as if they were Theory Y type people, then firms would be more efficient and better managed workers would be motivated and do a good job. Herzberg Hygiene factors vs. Motivators Herzberg believed that lack of hygiene factors including those below would make employees demotivated: (*main hygiene factors)

* good working conditions - conditions needed to do a job (safety, cleanliness, organised)

* good / fair pay* status- felling needed (could be as simple as getting along with colleagues) security (physical safety and not being worried you are going to lose your job job security)

having company policies in place that are fair to all employees and being made aware of what the company policies are

Hygiene factors have to be in place before the motivators below can be introduced:

achievement of a personal or professional goal recognition of a job well done employee of the month or even just being told good job

advancement/growth promotions, job expansion or being given more responsibilities or more people who you are responsible for

interest in the job doing something you enjoy and which is non repetitive

Maslows Hierarchy of Human Needs

The following needs must be met from the bottom up. The first 3 needs (Physiological , Safety and Security and Social or Affiliation ) are
called lower order needs.

The top 2 needs (Esteem or Status and Self-actualisation) are called higher order
needs.

The highest order need is never fully met as people generally want to be better off
than they are, so new targets are set once old ones are achieved.

Enquiry 2: Whos right for the job? Why is there a need for recruitment? Expansion of the business will introduce a need to get more staff. Replacement of staff who have left (dismissal, quit or retirement).

Safety and Security

Social or Affiliation

Self-actualisation Esteem or status Physiological needs needs needs needs

needs

Acceptance and contract signed or if refused start from shortlisted applicants

A position in the firm needs to be filled

Perform a job analysis breaking a job down to component parts

Offer the job or shortlist further for second interviews

The recruitment process

Interview those shortlisted Person specification and job description

Shortlist for the interview

Advertise the availability of the job

Compare applicants to person specification

Receive applications and CV

Job Analysis Breaking down the job into its component parts. From the job analysis the business can state in the advert: Job Description Job title The different tasks of the job What dept. the person will be working in Who the successful applicant is responsible to Who the successful applicant is responsible for Person Specification This is basically the type of person needed for the job. Qualifications (GCSE, IB Diploma, University Degrees, Masters etc etc) Work experience Skills (for example: languages, working in team, ICT, leadership)

Personality

Then the job can be advertised through: Internal appointment (saves time, you know the person, not much extra costs including training, good motivational tool) BUT (can cause resentment and leaves a gap in the firm) Newspaper Internet (website) Through exsisting employees (recommendations) Government and recruitment agencies Headhunting (usually for high level or specialist jobs) Personal inquiry Application Letter This is the candidates opportunity to say why he or she is ideal for the post CV Curriculum Vitae Personal details name, address, age and date of birth Academic and vocational qualifications starting from most recent and the qualification attained Jobs you currently have to the first job you have had duties in that job which are relevant to the post you are applying for Skills, hobbies, talents and personality which will are suitable to the post Name and contact of reference(s) Your CV needs to be:- brief, relevant to the job you are applying for, a way of selling yourself, truthful, interesting for the reader and sending the right signals to the employer. Keep in mind the firm will: compare your CV and letter of application to the job advertisement, to decide who they will call for the interview. get in touch with your reference(s) to vouch for you. Interview The final selection will usually take place through an interview. The candidates will be asked questions by a panel of interviewers in larger firms or be one person in small businesses to elaborate on information in the application letter or cv and to see if the applicant will fit in to the business. This is also a chance for the applicant to ask questions about the job, business and conditions. A test may also be given aptitude, situational interviewing, psychometric tests etc, to see aspects of the candidates personality and skills that may not appear in the application letter and cv. Job offer and acceptance Businesses are usually quick to offer a job so not to lose a good candidate and if accepted a contract of employment is signed. Contract of employment

This will include: job title and starting date rate and regularity of pay hours of work, holiday entitlement and sickness benefits place of work disciplinary procedures and how problems are to be dealt with Trade Union agreements Period of notice that needs to be given to end employment (by employer and employee) Pension rights and contributions Discrimination This occurs when one person is treated differently from another. Under several laws you cannot face discrimination when applying for a job. You cannot be turned down from a job because of: Gender or marital status Sex Discrimination Act 1975 Race, colour, nationality, ethnic origin or national origin Race Relations Act 1976 Despite these laws, many employers still discriminate. If they did not, men and women and people of varying ethnic origins would all get equal pay for equal work. Some people have difficulty getting a job because there is prejudice against them.l

Enquiry 3: Can we get more from less? The human resource department is responsible for recruiting and matching right people for the different jobs in the organisation and they, along with managers from each department, try to find ways to increase productivity. There are several ways increased productivity can be achieved:

1. Job enrichment where an employee is given more responsibilities. This is designed to

increase job satisfaction and should motivate an employee. (consider how this fits into each of the three theorists we have discussed)

2. Teamwork in a factory this can also be call cell production where each cell or team
is responsible for the days or weeks tasks. The team decides who is going to be the leader, what tasks will be performed by each member of the team and how will quality control be carried out. Through teamworking one can see that it can be used as a tool for job enrichment.

3. Quality control Productivity can be achieved through quality control being carried
out by each individual that comes into contact with the product. This does away with the need for quality control at the end of production and save costs and time of reworking faulty products which do not pass quality control. On going quality control ensures fewer errors are made and actually aims for zero errors by the end of the production line.

4. Communication Employees work better if they know why they are doing their tasks.
Involving employees with some decision making, asking for and acting on suggestions

made by the employees makes for a more efficient and productive working environment.

5. Training a corporate culture of continuous improvement will help a firm achieve and
maintain a competitive advantage. The firm needs to show they are committed to training their employees so that they will know they are valued and that they are doing the best job they can. Training such as learning new skills and using new technologies is essential to stay competitive. All of the above will increase productivity but it must also be considered how to motivate employees through financial and non-financial rewards in order to implement training programmes, team work, quality control measures, job enrichment and communication methods in the organisation. Enquiry 4: Whats the future of work? Over the years there have been several changes in the labour market: As population has grown so has the workforce Structural changes less people are working in the primary sector (extraction of raw materials including agriculture, forestry, and mining, fishing and quarrying). As raw materials (natural resources run out) more people find work in the secondary sector especially in developed countries (manufacturing industries including construction this involves changing the raw material(s) into finished goods).However even here businesses invest in machineries which reduces the need for people in this sector as well. This heavy capital investment results in technological unemployment where people are replaced by machines. Therefore more and more people find work in the tertiary sector (includes all services) including retailing, leisure, hotel and catering, finance, insurance and banking jobs. There has been therefore a reduction of primary sector employment, some growth in the secondary sector employment and even great growth in tertiary sector employment in developed countries such as the UK. More women are also participating in the labour force womens roles are changing from staying at home to seeking employment outside of the home. However, women are generally paid less and do not have as many opportunities. This benefits the employers as they can recruit women who cost less and are able to work part time. With improved technology people can also work away from the office (or work from home): oTeleworking involves using telecommunications to work away from the companys office base (use of internet, mobile phones, videoconferencing) Advantages include: - job creation in remote area and new opportunities for single parents or people with disabilities or long term unemployment. - promotes exports as firms may have overseas clients with different time zones (so would need to be in touch outside regular office hours) - enables a firm to retain people with scarce skills (look at BT case study page 60)

better quality work and less likely to be absent as their counterparts that go to the office - reduced costs as office space can be reduced. However: - employee must be trustworthy and reliable (Theory Y type worker) oHotdesking involves that workstations are available in the office for use by anyone who normally works at home, but who needs office space from time to time (ThomsonReuters in Dubai used hotdesking for some of their journalists). Voluntary work has also increased as people work for things other than financial rewards.

- teleworkers are thought to be more productive, loyal and likely to produce

Economically inactive Some people do not register as unemployed (therefore are not included in government statistics), do not earn an income for their work but are still contributing to society as a whole. These include caring for children or disabled, elderly or sick relatives, keeping house, cooking, doing odd jobs around the house (eg, handyman, painting etc. These jobs could be paid jobs for other people.

Structural unemployment has meant that people have to find new jobs in some cases finding new employment is very difficult. Technological developments have increased the need to change employment as businesses invest in technology to maintain or increase their market share. As technology is introduced to a business some people will be made redundant (as the need for their particular job no longer exists) but ultimately new jobs will also be created. This highlights the need for both companies and employees to be flexible in their attitude toward the working environment and the job market. People are likely to change their occupation as many as three, four or even more times during their working life. To enable this, individuals must be ready to retrain gaining both academic and vocational qualifications. A flexible labour market helps employers find workers when they need them as well. There has been an increase in part-time and temporary work. These may cause insecurity in employees but by law they are still entitled to a contract of employment within 13 weeks of starting a job a particular problem for temporary workers who may have dependents to support, as their contract may be for less than 13 weeks. The Changing role of Trade Unions In the past employees were exploited, laws were not in place and trade unions were needed to negotiate work conditions for the employees they represented. Collective bargaining was done as the union had more negotiating power than the individuals. Eventually employment laws were passed to protect the workers and trade union powers were limited. The manufacturing industry had the highest amount of union members. However, as this sector has seen a decline in full time workforce,

We have seen how employees and employers must adapt to changes: Availability of jobs are increasing much more rapidly in the tertiary sector than in the primary and secondary sectors (in fact there is structural unemployment in the primary and secondary sectors) Employers are using more technology to replace people (technological unemployment) but at the same time there is the creation of jobs which deal with developing, operating and maintaining new technology There is an increase in part time work There is an increase in women working There is an increase in people working from home (teleworking, homeworking) People who work around the home (caring for children, relatives who are elderly or disabled, keeping house, cooking, DIY) are adding real value (saving the need to employ someone to do these) even though the government considers them economically inactive (registered as unemployed or not in paid employment) Businesses need a flexible staff to be able to adapt to changes in their industries and employees need to be flexible in order to suit changes in their lifestyles and be able to take advantage of job opportunities. So there is a need as society to be more and more flexible. Very few people do the same job for their entire lives. The key to flexibility is better education or training that is not specific to a particular job. For example a need for basic numeracy and literacy skills, communication skills, working independently and as part of a team. Life long learning is necessary, this is to say continuing to develop your skills and education throughout your working life. The Learning and Skills Council try to match learning opportunities with the need for skills in their local area. This should stop the shortage of people with needed skills (IT for example) and the surplus of other skills. Some of the programmes include: Post 16 education and training Work-based training for young people Development of the workforce Adult learning Information, advice and guidance for adults Education business links The local Business Link training has developed the Investors in People programme where they provide a national standard that recognizes the contribution of individual businesses to the continuous development their employees skill.

Enquiry 5: What does joblessness cost?

Government Targets The four main economic targets are: A high level of economic growth (growth in GDP) 1. A low level of unemployment 2. A low level of inflation 3. External balance (balance between exports and imports) The main problem is that achieving one of these targets often means missing one of the others, as they often move in opposite directions. For example, a high level of economic growth will help improve living standards and create lots of jobs, but it may also cause inflation and attract a much higher level of imports. So you have hit two targets and missed two! This means that, in running the economy, the Chancellor faces 'tradeoffs' between the different economic targets.

Unemployment
Unemployment is very closely linked to the level of economic growth. If the economy is growing well, then there will be jobs created to satisfy this demand. However, if growth falters and firms need to reduce output, then they will lay people off. So when trying to achieve your unemployment targets and keep unemployment as low as possible, you need to watch the level of economic growth carefully. Economic growth tends to be cyclical (goes up and down in cycles over a period of time), and unemployment will also behave in this way. In periods of recession, there will be higher unemployment, and in times of economic boom, it will be lower. The increased unemployment caused by a downturn in the trade cycle is called cyclical unemployment as it varies with the cycle of economic activity. There are also other types of unemployment, though there is less that you can do directly to change these. However, you do always need to ensure that people have the incentive to work. If you put taxes up too much, then people may not want to work so hard, so try to keep the level of income tax down. This will encourage risk-taking and hard work and so should help the economy to be more productive. Also make sure that there is always a sufficient gap between the level of earnings that people can earn in work and the amount they get on benefits. You can do this by making sure that you keep the lower rate of tax down and the level of personal allowances up. This will help keep people on lower levels of earnings out of the 'tax net'.

Fiscal and Supply Side Policies

Fiscal policy is the use of government expenditure and taxation to manage the economy. The main changes in fiscal policy happen once a year in the Budget. It is in the Budget that the Chancellor sets the levels of taxation and government expenditure for the next fiscal year. The fiscal year runs from 6th April one year until 5th April the following year. This is why the budget is usually in March. The changes in it come generally into effect in the following month. Supply-side policies are policies that aim to increase the capacity of the economy to produce. Income tax will always have an effect on people's incentives to work. This will be true at most income levels. If income tax at low income levels is too high, people may choose not to work but to remain on benefits instead. If income tax on high levels of income is too high, people may choose not to work so hard and take risks. Ultimately they may even choose to leave the country if taxes elsewhere are much lower (a "brain drain").

Monetary policy - What? Why? How?

What is monetary policy? Monetary policy is basically the control of the money supply and interest rates to influence inflation and other macro-economic variables. The principal emphasis currently is on using interest rates, as control of the money supply was found to be very difficult in the 'monetarist era' of the early 1980s. In the past, interest rates were set by the Chancellor, but the incoming Labour government in 1997 gave the Bank of England 'operational independence'. As part of this they were given responsibility for setting interest rates to keep inflation to a target set by the government. The current target is 2% and the Monetary Policy Committee is the committee of the Bank responsible for the interest rate decision. Why do we need monetary policy? Inflation is considered to be one of the key economic targets. Keeping inflation low means a stable environment for people and business, and therefore creates the optimum conditions for the best possible level of economic growth. This in turn should minimise the level of unemployment. Stable inflation helps the economy grow for long periods and avoid booms and slumps. Monetary policy is considered the most effective way to achieve this.

How is monetary policy carried out? Setting interest rates is the responsibility of the Monetary Policy Committee. There are nine members of the MPC, four independent members and five from within the Bank. The committee is chaired by the Governor of the Bank of England. The government set an inflation target, which is confirmed in the Budget each year. The MPC meets monthly to assess the state of the economy and decide whether it is most appropriate to increase, decrease or leave interest rates the same. Intervention in the markets is then used to ensure that interest rates are maintained at the level set by the MPC.

Solutions to Unemployment
Inform job seekers about job availability through ie. through job centres Subsidise employment in specific regions or industries where there is high unemployment. ie. give prospective employers a tax cut if they employ a certain amount of workers Increase government spending ie. if the government builds more hospitals, schools, training centres people will be needed initially for the build but also once completed to work in them. The government can also build new roads (as Germany did after WWII to create jobs)

Cut taxation (look at Fiscal Policy on previous page) Retraining schemes: national, regional and industry-specific so that the workforce skills stay up-todate. Intervene in trade by using quotas and tariffs on imports, (called protectionism) so that consumers will purchase goods made in the UK, safeguarding local manufacturers and suppliers. Use the exchange rate to boost demand for home-produced products and services (if the exchange rate is weak compared to other currencies imported goods would be more expensive so consumers will by more domestic products)

Incentivise employment by removing low-paid from income tax liability (Fiscal Policy) Reduce interest rates (monetary policy) which would - make it less costly for business to expand or start up, if taking a loan. This will create more job opportunities. - make it less costly for individuals to make large purchases ie. houses and vehicles increasing demand for products which in turn creates a demand for employees.

Use the supply-side fiscal policies by: - Cutting the lower and basic rates of tax to open up the gap between earnings in and out of work and ensure people have an incentive to work - Increasing the level of personal allowances for the same reason - Reducing the top rate of tax to encourage enterprise, risk-taking and the incentive to work hard

What is Employment and Unemployment?

The population of working age refers to the number of people available for work and includes all those aged between 16 and 65. The level of employment refers to the number of people in work in an economy. The level of unemployment refers to the number of people out of work, actively seeking work and claiming benefit.

People are employed to do a job. That might seem rather an obvious thing to say but it is important. If that job contributes to the businesses sales then people will be needed. If, however, sales fall, some jobs may not be needed anymore and it is then that people can be made redundant and lose their jobs. Some people might lose their jobs because the business they are working for closes down. This can happen if sales fall to an extent that the business cannot cover its costs anymore.

Source: Crown Copyright. The level of both employment and unemployment can change depending on the level of economic activity. If economic activity falls we might expect to see the level of unemployment rising as a result. Unemployment not only depends on economic activity but also on the level of skills and qualifications that people have and how easy it is for them to move from job to job (occupational mobility) and also to different parts of the country to find work (geographical mobility).

What are the costs of Unemployment?

Unemployment can, in some cases, lead to all sorts of social problems not only for the individual but also for the economy. Those who are unemployed are more likely to be amongst the poorest in society. Copyright: Bauer X Unemployment can affect both individuals and the economy.

Individuals

They may find that they have lower incomes which affect their standard of living They may find it difficult to keep up with the skills required to find new jobs They may suffer family and personal problems They may lose their self esteem and self respect Lower levels of income are also associated with a greater likelihood of ill health

The Economy
There is an opportunity cost of unemployment - all the output that those people could have produced if they were employed The government receive less tax from unemployed people and this can affect the amount of money they have for public services like health and education Unemployed people have to be supported whilst they find work. The cost to the government of paying out benefits can be very high. Again, this takes money away from other public services The government might have to pay further money in dealing with the problems caused by unemployment - more crime, family breakdowns, ill health and so on

Task

Design a poster that shows how a change in economic activity can affect both employment and unemployment. Work individually and try to make the links between economic activity and the changes in employment and unemployment as clear as possible. You can use pictures to try and illustrate your points and make your poster as interesting as possible.

Extension Task
Explain how can the rate of employment can be rising at the same time as the rate of unemployment? (Hint look at the definitions given at the top of this page carefully).

The Working Population

The working population is the number of individuals in the UK available to work. This produces a figure for the total number of people in employment in the UK. We can then give a figure for the employment rate. This is the proportion of the population of working age which is in employment. At the time of writing (October 2006), the figures for these indicators were as follows:

Total number of individuals in employment is approximately 29 million Working age employment rate is approximately 75%

A proportion of those in work are self-employed. The self-employed are those who, in their main job, work for themselves, whether or not they have employees. At the time of writing, the figure for self-employment is as follows:

Number of self-employed is approximately 3.75 million This means that around 13% of those in employment are self-employed

The number of self-employed people in the UK now stands at 3.75 million! Copyright: Biz/ed team. It is useful, also, to identify those who are economically active or inactive. The economically active population comprises all those in employment or who are unemployed. This gives us the economic activity rate for the UK, which is measured as the number of people in employment or unemployed as a percentage of the total population (age 16 or over). The economically inactive include those in full time education and those who are long-term sick. At the time of writing, figures for economic inactivity are as follows:

Number of people economically inactive is approximately 7.8 million The inactivity rate for males is around 16%; for females it is 26% This is the lowest rate of female economic inactivity since 1971

Employment trends
In the UK, there has been a gradual shift in the number of people employed in the primary, secondary and tertiary sectors of the economy. This reflects a natural trend in employment patterns as an economy develops. In developed economies, there is a tendency for business to source lower cost inputs to production (such as labour and raw materials). For example, the UK's coal-mining industry has shrunk in the past 50 years not because the coal has run out, but because it has become uneconomic to extract it from the ground. It is cheaper to source imports of coal from abroad. Equally, as other countries have developed their economies, the UK has come to rely on them to supply the manufactured goods we demand. As the UK economy has developed, so we have come to demand more services in areas such as banking, finance, insurance, education, tourism, leisure and entertainment.

The amount of primary, "heavy" industry is lessening in developed countries, to be replaced by high-tech business and service industries - such as call centres. Copyright: Richard Style

It should come as no surprise that employment in the different sectors of the UK economy has changed considerably in the past twenty years. The following table illustrates this well:

Employment in the UK Economy 1985-2005 (% employment levels)

Year/Sector Primary Secondary Tertiary 1985 4.5 32.5 63

2005 1.8 19.9 78.3 Source: National Statistics Labour Force Survey.

Measuring Unemployment

The Labour Force Survey (LFS) is used to measure employment and unemployment in the UK economy. The LFS takes a sample of 53,000 households every quarter. The LFS uses the international standard International Labour Organ,,isation (ILO) definition of unemployment. Employment is also measured through the Workforce Jobs survey of 28,000 service firms and 9,000 production companies.Economic activity and inactivity is measured through the LFS and the number of unemployment benefit claimants is a count of those claiming Job Seekers Allowance (JSA). Eonomically inactive people include the following groups:

Those who do not want paid jobs Those who are unavailable for work Those who are not looking for jobs

The total number of economically inactive people in the UK has remained steady over a long period of time, at a usual level of within 500,000 of 7,500,000 people. But the make-up of the economically inactive has been changing over time. In the past, the most likely reason for people being unavailable for work was due to family or home responsibility. The overwhelming majority of people in this group were women. But as female participation in the workforce has increased, so the number giving this reason has dropped. The steady number of economically inactive is due to the rising number of sick or disabled people. In 2004 the top three groups of economically inactive people were as follows:

Looking after family/home: 30% Long-term sick: 28% Student: 21%

Source: Rounded data from TUC Economic and Social Affairs report 'Countering an Urban Legend - Sicknote Britain?' January 2005. In the 1980s and 90s, there were more than 30 changes made to the rules for claiming unemployment benefit. Some of these changes diverted people from unemployment to being long-term sick. The advantage of this was that people being laid off from work in the UK's coalfields could be classed as being economically inactive rather than unemployed. It is no coincidence that the UK districts with the highest levels of sickness claimants are those that experienced pit closures in the 1980s: District Easington Merthyr Tydfil Blaenau Gwent Neath Port Talbot % of total working age population 21.1 20.7 19.1 17.2

Glasgow 17.2 Source: Beatty and Fothergill, quoted in TUC report ibid

The Impact of Unemployment

Economic cost:
On the one hand, there is the loss to the economy of the output that an unemployed person would be able to contribute. If we assume that the average output per person is 15,000, then a total unemployment level of two million means a loss to the economy of 30 billion worth of goods and services.

This productive loss to the economy is an example of the opportunity cost of unemployment. On top of this, there is the cost to the economy in terms of the benefits to which the unemployed are entitled. In 2005-06, a total of nearly 130 billion was spent by the government on social security benefits. This figure includes all benefits in addition to JSA, but it gives an indication of the direct economic cost of unemployment and economic inactivity.

We also need to take account of another area of economic cost - the loss of tax receipts. When individuals are employed, they pay income tax and national insurance.

In 2006-07, the government expected to receive 144 billion in income tax and 90 billion in national insurance. Source: HM Treasury 2006 budget data

Social cost:
There is a clear impact on individuals and society of unemployment. Some of these effects are listed below:

Social exclusion of the unemployed Loss of self-reliance of the individual Deterioration of self-confidence Damage to the psychological well-being of the unemployed Deterioration of physical well-being of the unemployed

These damaging effects are likely to result in an increased burden on the National Health Service (NHS), the disruption and break-up of families and increased levels of crime.

Long-term unemployment can make people feel ignored and left behind by society - causing mental health problems, depression and illness. Copyright: Ben Lancaster

Trends in Unemployment
Overview
Unemployment is a flow, not a stock: this means that there are always people entering the unemployment register, as they lose their jobs; and there are always people leaving the unemployment register, as they get jobs. When inflows rise faster than outflows, then overall unemployment will increase. An important measure is the length of time that an individual remains unemployed. If the period of unemployment is short, then it is easier for an individual to gain a new job. This is because the individual's skills will not have been lost or degraded. Average length of time spent unemployed is therefore a good indication of the overall health of the economy. Official statistics often point to the number of vacancies in the economy as another good indicator of economic

health. These data are gathered from the Vacancy Survey, which counts on a monthly basis the number of vacancies in a sample of 6,000 businesses.

Historical view
The UK enjoyed very low levels of unemployment in the 1960s. These relatively low levels were maintained in the 1970s, despite troubles caused by big increases in the price of oil. But in the economic recessions of the 1980s and early 90s, unemployment rose rapidly, peaking at over 3 million in 1983-86, falling in the Lawson Boom of the late 1980s, before rising rapidly once again in the early 1990s. Since then, unemployment has fallen steadily, although in 2005-06 jobless levels began to rise.

Source: National Statistics, based on LFS summary data

The main types of unemployment

Frictional unemployment:

This type of unemployment is defined as occurring when people are 'between jobs' It may be due to delays in receiving invitations to interview or in issuing requests for references Frictional unemployment can be reduced by improving communication between employers with vacancies and job applicants Government can help this process by setting up a computerised job information service in Job Centres

Structural unemployment:

As the structure of the economy alters over time, people have to adapt to find new jobs in new parts of the economy This may mean that they have to relocate or retrain, or both of these, in order to get a new job Due to labour immobility, large pockets of unemployment can remain trapped in particular regions where the old industries were located

Government can help by providing subsidies to employers in regions with high levels of unemployment, or by improving labour mobility

Cyclical unemployment:

This is caused by low levels of demand and is seen when the economy is in recession Falling demand in the overall economy leads to reduced demand for labour Government can help by boosting the level of aggregate demand in the economy This would involve increasing public expenditure and/or cutting taxation

Seasonal unemployment:

This is caused by the seasonal variation of demand in certain industries or sectors of the economy It is seen at certain times of the year, in industries such as construction, tourism and in agriculture Industries affected may be encouraged to diversify their products or services so attract demand throughout the year, such as tourism venues competing for income from the conference market Employees in the affected sectors can be encouraged to retrain to compete for jobs in sectors unaffected by seasonal variation in demand

Technological unemployment:

This can be seen where firms use capital investment to reduce their reliance on unskilled or semi-skilled labour Examples of it can be seen in car production where automation and computer-aided manufacture has been introduced or in administrative jobs where the use of information technology has become widespread

Workers affected by technological unemployment must retain to seek new jobs

Regional unemployment:

This is where there are high levels of unemployment located in specific areas Where there has been concentration of industries which have declined as the structure of the economy has changed, this type of unemployment exists Government can help by offering regional aid, including incentives for new industry to relocate to areas affected

International unemployment:

This is where UK producers have been replaced by firms based overseas UK may be seen as uncompetitive in price or in terms of product build quality Government may choose to use trade policies such as quotas or tariffs to avoid this, but will face pressure from the European Union or World Trade Organisation, if it does so The exchange rate could also be used to artificially make UK goods less expensive to overseas' buyers

Voluntary unemployment:

Some of the economically inactive may be so through choice Perhaps they may find it more attractive to live off social security benefits Government can make working more attractive by using the tax system to allow low-paid workers to keep more of their income At the same time, these people could have their benefit payments reduced if they refuse to accept suitable job opportunities

The working population

o o o o

Individuals of working age available to work Self employed Economic activity Economic inactivity

Employment trends o o o o
Shift from employment in primary to secondary to tertiary sectors of economy Demand for highly skilled workers Demographic change Self employment

Measuring unemployment o o o o o o o o
Differences in counting unemployment Not just the out-of-work Registered unemployed and claiming benefit Unemployment rate is % of labour force officially out-of-work Labour Force Survey International Labour Organisation International comparisons Long-term sick

Impact of unemployment

o o o o

Opportunity cost Benefit costs Lost tax revenues Impact on individuals, families and households

Trends in unemployment o o o o o o o o
Unemployment is a flow not a stock If inflows of individuals registering as unemployed rise and outflows fall, then unemployment rises Length of time unemployed is a good indicator of the health of the overall economy - shorter the better Government likes to highlight number of vacancies registered as indicator of economic health Unemployment very low in 1960s As economy recovered in the late 1980s unemployment fell slowly Recession in the late 1980s to early 90s led to a rise in jobless levels Unemployment fell during the 1990s, remaining low by the official count since the late 1990s

Causes of unemployment o o o o o o o o
Frictional Structural Cyclical Seasonal Technological Regional International Voluntary

Tackling unemployment o o o o o o o
Better information about job availability Subsidize employment in specific regions or industries Increase government spending Cut taxation Retraining schemes: national, regional and industry-specific Intervene in trade by using quotas and tariffs Use the exchange rate to boost demand for home-produced products and services Incentives employment by removing low-paid from income tax liability